2 Canadian Dividend Stocks to Buy and Hold Forever in Your TFSA

These top TSX dividend stocks still look undervalued.

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Retirees and other investors focused on dividends are wondering which TSX stocks might be undervalued right now and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.

Fortis

Fortis (TSX:FTS) operates $68 billion in utility assets located in Canada, the United States, and the Caribbean. These include power-generation facilities, electric transmission networks, and natural gas distribution utilities that generate steady rate-regulated revenue.

Fortis trades for $55 per share at the time of this writing. The stock is about 10% above the 12-month low, but it is still far off the $65 it reached in 2022.

The slide in the share price that occurred over the past two years is primarily the result of market reaction to rising interest rates in Canada and the United States. Soaring inflation forced the Bank of Canada and the U.S. Federal Reserve to increase interest rates as a strategy to cool down the economy and ease the upward pressure on wages and prices of products and services. Fortis uses debt to finance part of its growth initiatives, so the jump in borrowing costs can put a dent in profits and cuts into cash that could be otherwise used for distributions.

Inflation is down considerably, and markets are anticipating a shift to more rate cuts in Canada and the start of cuts in the United States. The Bank of Canada just reduced interest rates by 0.25%. Lower interest rates should bring investors back into the stock.

Fortis is working on a $25 billion capital program that is expected to increase the rate base by about 6% per year through 2028. As new assets go into service, the higher cash flow should support planned annual dividend increases of 4% to 6% over that timeframe. Fortis has increased the dividend in each of the past 50 years. The current yield is 4.3%. This is lower than investors can get from other dividend stocks, but the steady growth in the payout drives up the return on the initial investment.

Enbridge

Enbridge (TSX:ENB) also likes the prospects for natural gas demand. The company is in the process of closing its US$14 billion acquisition of three natural gas utilities in the United States. This will make Enbridge the largest natural gas utility operator in North America.

Enbridge’s oil pipelines and natural gas transmission assets remain attractive as well. The company moves 30% of the oil produced in Canada and the United States and 20% of the natural gas used by Americans. Global demand for the two commodities is expected to grow in the coming years, and Enbridge is in a good position to benefit with its oil export terminal in Texas and its 30% stake in the Woodfibre liquified natural gas (LNG) facility being built in British Columbia.

Enbridge’s renewable energy portfolio has also expanded in the past few years and should continue to grow as the transition to solar and wind picks up momentum.

Enbridge has a $25 billion capital program that will help boost distributable cash flow (DCF) by at least 3% per year over the medium term. This should support ongoing dividend growth. Enbridge increased the dividend in each of the past 29 years. The current yield is 7.4%.

Enbridge trades for close to $49 at the time of writing. The stock was as high as $59 two years ago, so there is decent upside potential.

The bottom line on top dividend stocks for passive income

Fortis and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting passive income, these stocks look cheap today and deserve to be on your radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

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